Greek Deal Just Delays Doomsday

The much-hoped-for June deal between Greece and its “saviors”—the European Union, the International Monetary Fund (IMF), and the European Central Bank (ECB)—looks more and more like an effort to kick the can down the road as far as possible—and pray that things get better.

The European Central Bank is taking the lead in putting together this deal—and it’s only logical, therefore, that its concerns are driving its structure.

The bank’s big worry is the extreme vulnerability of the European banking system to a Greek default. Too many banks in France and Germany hold too much Greek debt, and any restructuring would require government rescues of the most troubled of these institutions.

A Greek default, the bank worries, would also destabilize the rescues of Ireland and Portugal, requiring the bank to open new fronts in its fight to keep the euro from imploding.

The outline of the deal looks like this: New loans from the International Monetary Fund, the European Union, and the European Central Bank in the vicinity of $40 to $50 billion would provide half of what Greece needs to fund its debts through the end of 2013.

The Greek government would have to come up with the other half by selling off government assets.

The worry is that no Greek government would be either willing or able to deliver on that level of asset sales. (Assets on the “for-sale” list include a stake in the port at Piraeus, the Post Savings Bank, and the State Lottery.) It’s not clear that there’s much of a market for these assets, either.

The Greek government hasn’t taken the tough steps—including large-scale firing of employees—that would be needed to turn these assets profitable. Any investor with a minority stake would be hard pressed to force that move.

The thinking now among European politicians is that some kind of external agency, independent of the Greek government and under the control of, say, the European Central Bank, may be necessary for a successful program of asset sales. While you’re at it, these same politicians argue, why not set up an external agency to collect taxes in Greece since the government there is so bad at it?

You can imagine how popular the idea of turning so much of the Greek government over to an outside agency is in Greece. One reason European stock markets are down today—the German DAX index and the French CAC 40 were both down 1.05% as of 12:30 in New York—is worry over the very real possibility that Greek politicians will balk at paying this price.

Let’s be very clear on what this deal would accomplish—if it gets done: Greece would still be a deeply uncompetitive economy with a massive debt load that it has no way to repay.
I still don’t see any way out of this crisis except a default or a restructuring of Greek debt. But a new package would push that event into 2013, the European Central Bank hopes, and that would give the Eurozone’s financial institutions enough time to prepare so that a restructuring wouldn’t produce a disaster outside of Greece.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.